Delaware’s Chow: Corporates Offer Diversification, But Risks

By Michael Aneiro

In our ongoing effort to divine what awaits the current corporate bond market in 2013, Barron’s checked in recently with Thomas Chow, manager of the Delaware Corporate Bond Fund (DGCAX). Although the five-star Morningstar-rated fund has gained 10.31% on average over the past five years, Chow says the math just doesn’t work out for double-digit high-grade corporate bond returns anymore. As Treasuries yields have fallen below the rate of inflation, high-grade corporates have become viewed as a super-safe alternative that yields a bit more, but that association belies some significant differences.

“The corporate market at least gives [investors] plenty of diversification in terms of industry, term structure, and an alternative to sovereign-type risk that is literally earning you zero,” Chow says.

Diversification is great, but as corporate bond spreads have fallen in tandem with Treasury rates, high-grade corporates are more vulnerable to rising rates than they’ve ever been. Chow is less bearish than some who see corporate bonds posting negative returns next year, but he cautions investors to understand the risks involved and remember why people invest in high-grade corporate bonds.

“I certainly understand how the overall spread is going to be more sensitive, and you can see a decline in bond prices as a result,” Chow says. “It’s not necessarily that you’re expecting double digit returns, its more of a peace of mind that you’re investing in companies that offer capital preservation and income.”

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